Until we see some proper competition in the banking industry, it will never be
entirely cured of its propensity for abuse

Just as bankers thought it acceptable to be seen in public again, along come another couple of whopping great scandals to send them scuttling back to the sin bin. There seems to be no end to the misdemeanours of finance. Last week came news of widespread abuse in “dark pool” trading, and now the record breaking $8.9bn (£5.2bn) in fines agreed by BNP Paribas for busting US sanctions.

These latest debacles pile in on top of the catastrophe of sub-prime lending, Libor and foreign exchange manipulation, PPI and interest rate swap mis-selling, tax evasion, mis-representation of financial statements, and … need I go on?

So potentially damaging to financial and economic confidence did François Hollande believe the BNP fines to be, that he appealed directly to the White House to overturn them. It seems as if – as is apparently the case in France, to judge by the attempt to neuter Nicolas Sarkozy’s attempted comeback – judicial and regulatory process is just an extension of the political game, there to be casually disregarded in the interests of supposedly higher purpose.

You’ll be pleased to know, however, that the French president needn’t have worried. According to Jean-Laurent Bonnafe, the BNP chief executive, “indications are that at this stage there will be no major impact on the business” – this from a settlement that includes a criminal conviction and a temporary ban on clearing dollar transactions for clients of the bank’s oil and gas offshoot. Never mind that the fines are getting on for double last year’s net profits, BNP is apparently man enough to take it on the chin and carry on regardless. The dogs may bark, but the caravan moves on.

All this tends to back the view, articulated by banking analysts at Credit Suisse, that repeated “regulatory gouging” of the sort we see in the banking sector is now so much part of the routine that it can no longer be regarded as anything out of the ordinary, and should therefore be accounted for as part of normal operating costs, rather than as exceptional. A comparison might be made with protection money that drug dealers are forced to pay the local mafia in order to stay in business. These payments too are recurring items, a nuisance cost that is just part of the price you pay for practising your trade.

This might seem a somewhat exaggerated view, but consider the evidence. European banks alone have so far paid out approximately $40bn in fines, compensation and litigation costs for the various scandals that emerged from the crisis. Recent estimates by Credit Suisse suggest there are at least another $66bn of these costs to come, bringing the grand total to well over $100bn, or roughly a half the total losses suffered by European banks on America’s sub-prime lending meltdown. And this is just on the abuses we know about. New ones keep popping up all the time.

As far as it goes, all this retribution may seem fair enough, although it certainly doesn’t help with the parallel regulatory aim of improving banks’ capital position to the point where they might feel comfortable about lending again. A constantly demonised banking sector is one that is unlikely to play its proper role in supporting growth.

But the current frenzy of disciplinary action also largely misses the point. Despite the crisis, despite the now almost daily public floggings, there is little to suggest any kind of fundamental change in the way banking operates and behaves.

As long-term protection from financial abuse, regulatory diktat and punishment therefore seems a remarkably ineffective form of correction. What’s required is more competition, but it is proving slow to non existent in coming.

Take the UK market. Yes there are a few new players entering the scene – Tesco, Metro Bank, Virgin Money, and so on. However, all these newcomers are basically just conventional banks dressing themselves up as something fresh. They are mere parasites on the pig’s belly, which don’t fundamentally challenge the present system. In any case, they are not going to make a significant difference either to the costs or safety of banking.

Regulators pay lip service to the idea of more competition, but are basically averse to it, if only because lots of small players are so much more difficult to keep an eye on than a very limited number of much larger ones. Any bank failure is a failure too many, but an environment in which small banks occasionally go bust and have to fall back on deposit insurance is plainly preferable to one in which the whole economy is threatened by the abuses and recklessness of just one or two very large operators. And yet regulators set barriers to entry so high that genuine entrepreneurial and innovative endeavour becomes all but impossible.

A large part of the mischief lies in the payments system, which is run along the lines of an elaborate cartel and is extraordinarily difficult for any intruder to crack. Whether it is use of a credit card, the Bank Automated Clearing System (BACS), the Society for Worldwide Interbank Financial Telecommunication (Swift), or cheque, all transactions will at some stage come into contact with established payment systems, making it impossible for new forms of banking to bypass the often opaque charges and technologies of the incumbents.

By these methods is the banking oligopoly sustained. There is no particular conspiracy against the public; it’s just the way the system works. And it touches all forms of banking. An IPO on Wall Street, for instance, is never going to cost less than 5pc to 6pc of the sum raised, despite apparently cut-throat competition for the business.

I don’t pretend to know the answer to these problems, unless it be Bitcoin or some such other alternative currency supposedly free of all transactional charges. What I do know, however, is that until we see some proper competition in this industry, you’ll never entirely cure it of propensity for abuse, whatever the regulators throw at it.

As Dow soars to record, no sign of the Fed removing the punch bowl

The Dow Jones Industrial Average swept through the 17,000 mark for the first time this week. I’ve been more bullish than many press commentators about stock markets, but none the less, the present dash for the summit has taken me somewhat aback. I’m ever more suspicious of these rarefied heights. Either the world economy is in for a much stronger and longer period of growth than most think likely, or there is a profound mispricing going on.

But rather than dwell on what is starting to look eerily like irrational exuberance, it may be more instructive to ask what might come along to upset this happy disposition. Valuations certainly look a little overstretched, but not so far gone that they must surely soon topple over of their own accord.

Meanwhile, worries about a major credit event in China seem fast to be receding. And the geo-political outlook certainly looks more troubled than it has in a long time, but again, not so bad that major advanced economies look to be in any danger of being sucked into serious regional conflict.

No, there is really only one identifiable danger, which is that the US Federal Reserve and its fellow travellers have got their thinking on interest rates seriously wrong, forcing them into a rapid change of direction. That would kill bond markets stone dead, all puffed up as they are by years of central bank money printing, and with them equity prices.

Judging by ultra-dovish comments this week from Janet Yellen, the Fed chairwoman, there is very little chance of that happening any time soon. Repeating the new central bank mantra, she said there was no need to raise interest rates merely to address concerns over financial stability and developing asset bubbles. It all sounds strangely reminiscent of Alan Greenspan in his years of pomp. But for the moment, the party goes on, with no sign of the Fed stepping in to remove the punch bowl.